Today we will be discussing the diversification of our defence industry.

In my annual Address to the Federal Assembly in 2016, I directed the defence industry to boost the production of high-tech civilian and dual-purpose
goods. Their share in defence companies’ output must increase to 17 percent by 2020, 30 percent by 2025 and 50 percent by 2030.

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The attainment of these goals will give our defence companies confidence
in their immediate and more remote future and will allow them to work to full
capacity, without unnecessary idling, and hence to maintain their financial
stability after the period of peak investment in army and navy rearmament ,
when the size of the state defence orders will go down for objective reasons.

Diversification will strengthen the economic stability of the defence
industry as a whole and our critical infrastructure sectors amid cyber threats
and other challenges, fluctuating currency and the like. In other words,
diversification will help minimise the effect of factors that can have a negative effect on the implementation of the majority of investment programmes
by our infrastructure monopolies and state corporations.

It should be said that some large companies have ramped up their
civilian output and will reach their 2020 targets already this year. Rostec
expects the share of civilian goods in its total output to reach 29 percent,
and the figure for the defence industry as a whole has been estimated at 20.7
percent.

Let me put it bluntly: the system has not yet gathered momentum, and the measures we have taken appear insufficient to reach the 2025 and 2030 targets.

This is what I consider our priorities.

First, at the meeting in Ufa on January 24 of this year I gave a number of instructions to form a regulatory
base that will allow defence enterprises to diversify production. This work
must be completed before the end of this year. Special attention must be paid
to legislation that will determine the range and the share of civilian products
to be purchased by natural monopolies, state corporations and federal
government bodies. As we agreed, they should become the key purchasers of such
products at the initial stage. Hardly anything will start moving without this procurement
order.

Second, we must establish a system
to control the diversification process. Regrettably, it does not exist. It is
necessary to determine clearly how many civilian products each defence
enterprise will manufacture and to which markets it will supply them at least
for the next three years, with a year-by-year break-up. It may look like an administrative approach, but all the evidence suggests that there is no
alternative because, to emphasise once again, in general this work is
proceeding slowly.

Third, proceeding from the calculations that have been performed we must determine the scale and range of products requiring state support for each project, including subsidies for loan
rates and R&D expenses.

Fourth, I have already said that
diversification must blend with the implementation of national projects or development programmes. Participation of the defence industry in such projects is
an important instrument of encouraging demand and increasing the production and sale of the civilian products of these enterprises.

In this context, I consider it expedient
to coordinate the plans of defence enterprises for the manufacture of these products
with investment programmes of natural monopolies and state corporations and the procurement plans of federal executive bodies that take part in national
projects. This is technical work but it is not easy. It must be carried out by all means.

Today I would like to hear your
opinion on how and when this work can be launched.

And the last point. Considering the importance of the diversification programme, it is necessary to continuously monitor
the dynamics of this process. I would like to hear your proposals on the best
ways of doing this.

In conclusion, I would like to emphasise once again that the diversification of the military industrial
complex is one of the key strategic national tasks. We must realise this. We
have spoken about this many times. The defence procurement will decrease with time.
What will you do? The steady development of the industry and Russia’s entire
economy and, most importantly, its defence capability and security in the long-term
directly depend on the successful implementation of this task. Even if we do
not use these capacities for the manufacture of defence products, we will still
need them and it would be at the very least inappropriate to reduce them.